Final answer:
When the required reserve ratio is increased from 20% to 25% for a bank with $50,000 in demand deposits, the new required reserves are $12,500. Initially, the bank had $15,000 in total reserves. Thus, after meeting the new reserve requirement, the bank can lend out the remaining excess reserves of $2,500.
Step-by-step explanation:
When addressing how much a bank can lend when the required reserve ratio is increased, we need to calculate the new required reserves and then determine the excess reserves available for lending. Initially, the bank has excess reserves of $5,000 with demand deposits of $50,000 and a required reserve ratio of 20%. If the reserve ratio is hiked to 25%, the bank must hold 25% of $50,000 ($12,500) as reserves.
Initially, at a 20% reserve ratio, the bank was required to hold 20% of $50,000, which amounts to $10,000 in required reserves. With excess reserves of $5,000, the bank held a total of $15,000 in reserves. When the requirement increases to 25%, the bank must hold an additional $2,500 to meet the new requirement (going from $10,000 to $12,500).
As the bank was holding $15,000 in total reserves and the new requirement is $12,500, the bank now has excess reserves of $2,500. Given this, the maximum amount the bank can lend out is the remaining excess reserves after meeting the new reserve requirement, which is exactly $2,500 (Option D).